By Peter Slevin
Washington Post Staff Writer
Sunday, May 21, 2006
GOLDFIELD, Iowa -- The complex looks like a refinery and smells like a bakery. From a pipe at the back flows a clear liquid that could be confused with vodka, except it can power an automobile and, its backers hope, propel ordinary Iowans into biofuel heaven.
The pungent liquid called ethanol, made from corn, has Iowa farmers giddy. Inspired by high oil prices and changing sentiment in Washington, thousands of investors are pouring tens of millions of dollars into new facilities, such as the gleaming $90 million plant here.
"We'll be the Arabs of the Midwest," mused John Becker, manager of a farm cooperative in Craig.
Ethanol prices are surging across the country as legislators add incentives to spur usage and fleet owners rejigger their fuel orders to cope with $3-a-gallon gasoline. The boom has meant profits for early investors, corn farmers, truckers and suppliers, even as financial analysts and government officials hurry to assess the fuel's staying power and its impact on such matters as farm subsidies and national security.
With national capacity more than doubling in the past three years and set to grow an additional 50 percent by the end of 2007, the wave is moving fast -- from New York, where Gov. George E. Pataki (R) this month announced construction of the state's first ethanol plant, to California, where Microsoft Chairman Bill Gates recently invested $84 million in Pacific Ethanol Inc.
Iowa, the top corn-producing state, is the nation's ethanol leader, generating 25 percent of U.S. ethanol in towns such as Coon Rapids and Steamboat Rock. In addition to 22 ethanol refineries in operation, the state has seven under construction and at least 20 are being planned.
The boom here has largely been a grass-roots phenomenon, fueled by clusters of growers, bankers and small-town professionals. Aspiring biofuel plant owners have been barnstorming the state, delivering investment pitches in firehouses, schools and community centers.
Six thousand farmers have bought in.
"There's quite a bit of exuberance for the ethanol plants. They're paying real good dividends," said Rockwell City farmer Keith Sexton, president of the Iowa Corn Growers Association and an investor in four biofuel refineries. "It's coming on board almost faster than a person can keep up, unless that's your day job."
The state legislature this year passed incentives designed to increase the percentage of ethanol and biodiesel in Iowa fuel sales to 25 percent by the end of 2019. Three of every four gallons of gas sold in the state contain at least 10 percent ethanol, although most of the state's production is shipped elsewhere.
Ethanol is the fuel Henry Ford originally envisioned for his mass-produced Model T automobile. It is blended into three of every 10 gallons of gas sold in the United States, although its percentage of the overall national fuel supply remains tiny. The clear liquid burns more cleanly than gasoline and, unlike that of crude oil, the potential supply is virtually unlimited and close to home.
In signs that big-time players are betting on ethanol's future, Illinois-based agribusiness giant Archer Daniels Midland Co. recently announced a large expansion, while car makers are increasing their commitment. General Motors Corp. says it will manufacture 400,000 more flex-fuel vehicles, which will join more than 5 million on the road.
Big manufacturers are also making engines that can run on biodiesel, a smaller but fast-growing segment of the industry.
At a gas station in Hiawatha, outside Cedar Rapids, an ethanol-infused gallon of 89 octane premium gas recently cost $2.69, 10 cents a gallon cheaper than the weaker 87 octane regular.
"Once ethanol got cheaper than gas, it really took off," said Bill Horan, a farmer who is putting together investor groups for new plants.
The response to investment groups has been stunning.
Two years ago, it took less than three weeks to raise about $20 million from 472 investors for the Goldfield plant in central Iowa. The average investment was $47,000, and two of every three dollars came from within 40 miles, said general manager Brad Davis.
Recently, the money has started arriving even faster.
When Horan and his partners sought $20 million for each of three new biodiesel plants, no request took longer than 10 days to fulfill. In one case, the offer was fully subscribed in eight days and the organizers sent $2.5 million back. Horan said banks have been willing to lend large sums with no collateral other than the refinery itself.
"People will drive all the way across Iowa to come to a meeting," said Horan, who grows soybeans and corn on 4,000 acres in Knierim, about 100 miles northwest of Des Moines, with his brother Joe. "It's the opposite of Big Oil. It's Little Oil. It's our oil."
The added demand has increased corn prices as much as 8 cents a bushel this year. A typical plant generates at least 30 jobs in rural Iowa, even as it creates uncertainty in long-established relationships among producers, cooperatives and buyers.
"Everybody in the corn industry is repositioning," said Joe Horan, on the board of the Goldfield plant. "Everybody's just kind of dancing right now, trying to find the right partner."
The way the Horans see it, the popularity -- and the political support -- for biofuel will increase as the number of people with a stake in it grows.
"Every time a plant is built," said Bill Horan, "that's 500 more ethanol supporters in a congressman's district. And they really care. It's not just Ma and Pa on the farm. It's their dentist son in Chicago who's interested in his inheritance, and his sister in San Francisco."
The farmers have their own incentives to find cheaper sources of fuel. To plant their crop this year, the Horans will use 10,000 gallons of diesel. The fuel costs continue through the summer to harvest season, powering the engines that sow, tend, reap and transport beans and corn.
"There's all kinds of things that inspire us. We think it's going to be here for the long term," said Dave Hoffman, owner of a farm supply store in Merrill, about 20 miles northeast of Sioux City, who is assembling a new investor group. He pointed to environmental gains, profit margins, legislative support, the spiraling cost of oil and sorrow over the war in oil-rich Iraq.
"We hate to see our soldiers go over and die for this," Hoffman said.
In June 2005, ethanol was going for $1.20 a gallon on the Chicago commodities exchange. At the end of April, it was $2.68. And, after two successive bumper crops, the price of corn is low, which adds up to substantial profits for the ethanol pioneers.
But suppose the price of oil declines -- if, for example, the economies in China and India slip, the global oil market grows calm and a booming ethanol supply outstrips demand. Suppose Congress supports President Bush's recent call to eliminate the tariff of 54 cents a gallon on plentiful Brazilian ethanol.
"This is a cyclical business. There are going to be ups and downs," said Monte Shaw, executive director of the Iowa Renewable Fuels Association, the biofuel trade organization. "But demand for these fuels is going to grow. Of that I'm absolutely certain."
Beyond Brazil's product, a potential competitor now in development is cellulosic ethanol, a far more potent biofuel that can come from switch grass and farm waste. Production is not yet cost effective, however, and Iowa's biofuel believers say they can convert their plants and their business model if things change.
"No threat. It's an opportunity," Shaw said. "We are in Iowa. All you see is cellulose."
From their home at the intersection of two gravel roads in central Iowa's Rockwell City, Keith Sexton and his wife have invested in four biofuel plants. The oldest of the investments is already giving them an annual return of 15 to 20 percent. But being a farmer, vulnerable to unpredictable acts of nature that deliver glut and scarcity alike, Sexton carefully guards his hopes.
"History tells us that when there's an industry that's very profitable, there's going to be such an influx of people wanting to participate that it's going to be oversaturated," he said. "But it appears that the demand potential can sustain all the plants being built right now."
Bill Horan put it another way.
"We're 3, 4 percent of the country's liquid fuel now," he said. "We've got a long ways to go."
Staff writer Kari Lydersen in Chicago contributed to this report.